Category Archives: Amazon

We’ve been doing a good deal of thinking about the future of ecommerce as the world goes mobile. As we all know people are increasingly accessing the internet and shopping from their smartphones (one of our more recent investments has 81% of it’s traffic from mobile), and within mobile people are spending a larger and larger share of their time in apps at the expense of browsers. That presents a challenge for retailers of occasional purchases whose customers don’t use them often enough to download an app. On the web these retailers found their customers via search, but that doesn’t work as well on mobile.

So how will discovery work on mobile?

In a couple of different ways, I think.

Firstly some apps will aggregate goods from lots of retailers and discovery will happen in app. Amazon is the best example here, but different types of discovery are appropriate for different types of purchase and whilst Amazon works well for commodity goods it doesn’t work so well for higher value goods where the purchase is emotionally driven. That creates space for startups to build discovery experiences focused on specific verticals. Good examples include Houzz in interior design, Thread.com and Stylect in fashion, and Top10 in travel. We have invested a lot on this theme and the last three examples are partner companies (note Thread is working on their mobile app).

Key to success for these companies is building a loyal customer base with high life time values. The aggregation needs to be broad enough that transactions occur frequently but narrow enough that product discovery is truly engaging. Strong brands will be built on the back of great product ranges and strong discovery experiences.

Secondly, some companies will focus on a small range of their own products. They will be primarily web based (including mobile web) and may not need an app. Strong brands will be built on the back of amazing products and first class marketing. Facebook is the best channel for many of these companies, for now at least. Bonobos in the US is a good example, and amongst our partners I would point to Lost My Name, Big Health, and Spoke.

An interesting question for the first group is whether the aggregation moves from apps into the OS layer, or something similar. There are lots of hints we are headed in this direction:

Baidu surfaces recommendations from maps

Facebook’s Instant Articles pulls news discovery into Facebook

Amazon’s Echo device enables re-ordering via voice command

If aggregation does move to the OS layer then in the short term partnerships will become critical drivers of traffic and custom, and in the long run I hope we will see a meritocratic discovery process emerge.

Update: Benedict Evans argues here that the trend within mobile towards apps is concentrated in a small number of apps (mostly Facebook and YouTube) and hence less significant for ecommerce companies than one would think

Another thing that we [Amazon] believe is pretty fundamental is that the world is getting increasingly transparent—that information perfection is on the rise. If you believe that, it becomes strategically smart to align yourself with the customer. You think about marketing differently. If in the old world you devoted 30% of your attention to building a great service and 70% of your attention to shouting about it, in the new world that inverts.

Just about everything I read from Bezos is on the money and this is no exception. The big driver of increasing transparency and information perfection is social media. Everyone has a printing press these days and it’s no longer possible for companies to control the message. Hence it makes sense to invest more in product and correspondingly less in sales.

This is doubly true for startups for whom it is increasingly true that there is no other strategy than to win by having the best product, and often the best product by a mile. When competing with large incumbents the rule of thumb is that winning requires having a 10x better product.

Finally, think of product as encompassing the whole user experience, from sales and marketing through delivery to after sales care.

Amazon is committed to driving down costs and providing better value for its customers. They’ve also been in trouble for paying low wages in their fulfilment centres. Hence it’s not surprising that they are investing heavily in warehouse automation systems. Back in 2012 they acquired robotics company Kiva and now they have announced their latest generation warehouse which uses “robotics, vision systems, and other high-end tech”.

The interesting thing for me is what this means for jobs. There have been lots of predictions recently that up to 40% of employment is at risk from automation and artificial intelligence such as Amazon is deploying. As you can see from the picture above the new warehouses do still have human workers, so we aren’t looking at a 100% automation scenario. However, if we compare the growth in Amazon’s employees with their revenue growth we can get a picture of the extent to which these new technologies are displacing human labour.

Amazon said recently that it will hire 80,000 additional workers to fulfil customers orders this holiday season. That’s a 14% increase on last year. Revenues meanwhile are growing at 21% so it follows that without the robots there would have been a requirement for more additional workers. A 21% increase in additional workers would have taken the total to around 85,000, making it a reasonable first level assumption that the robots have taken 5,000 jobs.

Moreover, it would be interesting to see the job numbers broken down by fulfilment centre. My guess is that the newer centres are more tech enabled than the older ones, and in those new ones a greater amount of human labour is being replaced by robots.

And is this a bad thing?

In the long run, no, so long as we can feed and house everybody it is a good thing that robots are liberating us from menial jobs. In the short term it’s also good, so long as unemployment stays low. Additionally, whether it’s a good thing or a bad thing is slightly irrelevant because it’s happening and it would be a huge mistake to try and stop it. That would mean forcing companies to use less efficient means of production undermining which would undermine competitiveness and send business and jobs to jurisdictions that weren’t restricting the use of robots.

It’s pretty well recognised now that a strong company culture helps bring success to a business, but what’s new is that a company’s culture is starting to matter to consumers. Moreover, whilst shareholders may judge a company’s culture on how much it contributes to good execution, customers judge it on ethical grounds.

Hence, for the second year running Amazon Anonymous are running a boycott Amazon campaign this Christmas which they claim has so far diverted £1.3m of spend (many of my north London neighbours will be pleased…) and a rangeofpeople are urging us to boycott Uber. I think we will see more and more of this sort of thing. People are increasingly concerned that the companies they shop with match their values. This plays out positively for companies with a strong ethical profile and negatively for those with unpopular practices.

Interestingly, some of the elements of company culture which have historically been great for shareholder value are the ones that are now undermining brands. Taking the examples above, Amazon’s famously frugal culture has landed them in trouble for low wages and Uber’s all out aggression has led them to many actions that most people view as unacceptable, most recently threatening journalists with smear campaigns.

I think we are heading towards a better world where unsavoury behaviour is tolerated less, but it is also a more complicated world for managers.

Amazon has never been a user experience company in that sense – it thinks about user experience the way Fedex does, as something to focus on ruthlessly, but not as a playground for new experiences.

I’ve been long on Amazon for ages now (and hold some stock), but this got me thinking.

When I look at the companies we’ve been investing in recently they are all delivering new experiences and their success is predicated on delighting customers. We love it when there is a real ‘wow’ moment. That’s what happens when people get their book from Lost My Name or when they’ve swiped 10,000 pairs of shoes on Stylect, to take two of our most recent investments.

I think those ‘wow’ moments are increasingly important for Amazon and other large companies too. Existing user flows should still be optimised, of course, but these days that’s table stakes. It’s the ‘wow’ moments that get customers excited, makes them loyal, generates word of mouth marketing (the most important kind), and gets free press.

I’m skating slightly ahead of the puck here, but given that everything is changing and commoditising with increasing pace these days all companies (large and small) will have to deliver those wow moments to stay relevant. And that means thinking about UX as a playground for new experiences.

I love Amazon and AWS for the way they keep cutting their prices and for the way they support the startup ecosystem. As an example they offer Forward Partners companies, and the companies from many accelerator programmes $10,000 of AWS credits, effectively making it free to get started on their platform. For these reasons Amazon is the first choice for most startups.

However, Google just slashed its cloud prices and is not cheaper than Amazon for all but the heaviest users. Significantly cheaper in fact. Pricing for these products is complicated, but by the analysis of cloud management software company Rightscale Google is 30-60% cheaper for on-demand usage (i.e. light usage), 21-32% cheaper for 1 year heavy reserved instance pricing (i.e. moderate usage) and 3-19% more expensive for 3 year heavy reserved instance pricing (i.e. heavy usage).

Price decreases come regularly in this market and I’m sure Amazon will take action soon, otherwise startups will start turning to Google. I can watch this sort of price competition all day long, but it will be interesting to see how Google fairs playing the price game against Amazon. Historically they have been a high margin monopoly type business whilst Amazon has always been about low prices.

Amazon has long pursued a strategy of winning by pricing low. Many of you will have experienced that strategy first hand with regular price reductions from Amazon Web Services, but it goes right across their business. Their approach has led to strong revenue growth but few profits which has analysts sharply divided – some believe they will never make large profits and the shares aren’t worth much whilst others believe that they are building controlling positions in market after market which will put them in great position to improve margins over time. I’m in the latter camp.

I just read the following story about how their low price ethos played out when they entered the DVD market in 1998. It’s a great case study about the importance of playing to your strengths, having a clear mission and running sustainable strategies. Stay with it through the first paragraph…

If you have bigger lungs than your competitor, all things being equal, force them to compete in a contest where oxygen is the crucial limiter. If your opponent can’t swim, you make them compete in water. If they dislike the cold, set the contest in the winter, on a tundra. You can romanticize all of this by quoting Sun Tzu, but it’s just common sense.

I worked on the launch of the Amazon Video store, Amazon’s third product after books and music. At the time of the launch, DVDs had just launched as a product category a short while earlier, so the store carried both VHS tapes and DVDs. The day Amazon launched its video store, the top DVD store on the web at the time, I think it was DVD Empire, lowered its prices across the board, raising its average discount from 30% off to 50% off DVDs.

This forced our hand immediately. Selling DVDs at 50% off would mean selling those titles at a loss. We had planned to match their 30% discount, and now we were being out-priced by the market leader on our first day of operation, and just before the heart of the holiday sales season to boot (it was November, 1998).

We convened a quick emergency huddle, but it didn’t take long to come to a decision. We’d match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.

After a few weeks, DVD Empire blinked. They had to. Sometime later, I can’t remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.

The key takeaway for me is that Amazon’s mission of being a low cost supplier coupled with the knowledge that they were financially stronger than DVD Empire made the decision to match the price cut a no-brainer and hence easy to take quickly, whilst DVD Empire probably should have known their bluff would get called.

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

Paradoxically, for startups the opposite is also true, in that they are built to take advantage of a change. In Amazon’s case the change was the arrival of the internet and the constants were people’s shopping requirements – price, range and convenience. It pays to think about both the changes and the constants.

In response to probes from the Office of Fair Trading in the UK and the Federal Cartel Office in Germany Amazon has dropped its price parity policy in Europe which stipulated that Amazon Marketplace vendors couldn’t offer the same goods on different websites at lower prices.

That’s great to see. To my mind Amazon was using its scale to bully smaller retailers to protect it’s revenues and margin. Amazon does a job as a middleman and deserves to get paid for that, but their rake should be subject to competition. Simple as that. I just checked in on their pricing page, and they take 10-15% for most product categories, but the highest is 40%, which is surely too high. Going forward it will be worth checking for better prices elsewhere, particularly if you are buying Kindle accessories, jewellery or watches.

Overall I’m a big fan of Amazon, and the Marketplace offers great distribution to its vendors, but there are elements of the company that need to be held in check. It’s great to see our competition policy being effective in this instance and that our institutions are working. I think that’s largely down to the increased powers they’ve been getting in recent years, including the power to fine companies up to 30% of global turnover.

Amazon’s pricing parity policy still stands in the US. It will be interesting to see how long that lasts.

I just read the following good list of e-commerce trends for 2013-14 on Quora:

Commodotisation of online stores. Even lower barriers of entry for anyone looking to build an online store (or sell something) led by solutions like Shopify,WooCommerce, Gumroad and Tictail.

Consolidation of niche online stores that focus on long-tail products by larger marketplaces e.g. Fab.com & Referly. Possibly leading to more mergers and acquisitions by larger online or offline retailers.

Customisation for each shopper. Intelligent & real-time data leads to condition based events that are unique to sub-sets of users or individual users. e.g.GoSquared + contests/recommended product at a special discount

Mobile purchases will increase led by better checkout experience from responsive sites.

More physical retailers will learn to harness online real-time data in their physical storefronts especially social currencies like positive tweets.

Online stores will differentiate by offering more of the standard offering e.g. daily deals and include mechanics that are harder to replicate e.g. videos and live events with high production values

Influencers will get more prominent tools to curate beyond what Pinterest or blogs currently offers. Making it easier to reach out to specific demographics and market segments at the top of the marketing funnel, see Your mix of inspiration

It’s a good list. I would put more emphasis on mobile and add something about niche markets, community, brand and direct relationships with the manufacturer. As Amazon and other large players leverage their scale to drive prices down new entrants will seek to compete by leveraging support from their community, building fun and engaging brands and capturing the margin taken my retailers. This strategy is difficult to execute but large value will accrue to those who succeed.

Brief Bio on Me

Managing Partner at Forward Partners - on a mission to invest in the UK's best eCommerce companies.

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Forward Partners helps ecommerce founders from raw idea through to Series A with a combination of investment, proven methodologies and office space. Our team knows how to build startups. Drawing on experience gained in companies such as Facebook, Mind Candy and HouseTrip, we've developed tools and services to help entrepreneurs execute with speed and focus.

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We run regular Office Hours for solo founders of ecommerce companies at the idea stage. The next one is on May 7th. I'd love to see you there!